Whether your business is large or small, you need a good inventory turnover ratio for your business to thrive. Without good turnover, you can’t pay lenders, employees, or suppliers, and overhead costs could go through the roof. But what ratio do you need to keep your business healthy?
What Is a Good Inventory Turnover Ratio?
An inventory turnover ratio between 4 and 6 is usually a good indicator that restock rates and sales are balanced, although every business is different. This good ratio means you will neither run out of products nor have an abundance of unsold items filling up storage space.
If you calculate the turnover ratio for each of your products, it will help you determine what your customers want and need while keeping your business out of the red.
Inventory turnover ratio is a calculation that shows how many times a product or service was sold and replaced within a given timeframe. It represents your company’s ability to sell items without stockpiling them.
Low vs. high turnover ratio
Low – If a product or service has a low inventory turnover ratio, it’s selling slowly. And it’s probably overstocked. A low ratio creates additional expenses:
Outdated or spoiled items
High storage costs
Delays in replacing old items with newer ones that might sell better
High – A high ratio means that an item sells well, but it could also indicate that there’s not enough of it in stock. And there are disadvantages to a higher-than-average inventory turnover ratio.
Sometimes, continuously high ratios for an item lead to frequent shortages and cause your clients or customers to find another source.
Every high ratio does not mean you’re making a profit on sales. If you’re losing money on a product—even if it sells well—a high ratio isn’t healthy.
A high volume of sales can lead to overstocking products that will expire, go out of style, or lose their warranty.
You can determine the inventory turnover ratio for a product with this calculation:
Cost of goods sold for 12 months ÷average inventory value during the same 12 months
Cost of goods sold – It’s your cost to produce your sold product—not the selling price. It includes expenses for materials, labor, distribution, sales force, and all direct or indirect costs related to an item.
Average inventory value – It is the inventory value of a product within a specific period.
$300,000 cost of goods sold for 12 months
$125,000 average inventory value for the same 12 months=2.4
You turned the inventory 2.4 times during the 12 months.
If you stock more than a handful of products, it can be time-consuming to calculate the inventory turnover ratio for each of them. But Sortly’s inventory management software can provide you with reports and data on demand, making your calculations a breeze.
Sortly makes it easy to get started:
Use it with a desktop or laptop computer, iOS, and Android.
Scan barcodes or QR codes into the software with a Bluetooth scanner or the camera on your mobile device.
Save existing inventory spreadsheets as CSV files and upload items into the software.
Create and print barcodes or QR codes for new, unique, or unlabeled items.
Customize items, views, and reports.
Set low-stock alerts and schedule date reminders.
Give access to customers or employees and set permissions on what they can view or edit.